Staying Out of Court: a 12-point plan
May 20, 1997 12:00 PM, Fred S. Steingold
Trials look like fun on television. Don't believe it. It's one thing to be an unaffected spectator; it's quite another to be an active participant in a legal battle.
For one thing, juries are unpredictable. If your business gets sued, it may be socked with a huge verdict. And, because of the time, energy and money it takes to defend a case, even if you win, you lose.
Plaintiffs often fare as badly as defendants. Either side in a lawsuit can look forward to long sessions in a lawyer's office. Pretrial discovery - the process that lawyers use to learn about the opponent's case - will gobble up additional hours. And you'll probably face lengthy written questions and cross-examination at a deposition.
Even if the case gets settled before trial, your bank account will feel the strain. Perhaps worst of all, you'll be surprisingly distracted from your normal business duties.
It's smart to stay out of court. True, it's not possible to avoid all lawsuits. But with a bit of planning, your business can come close. Here's a 12-point strategy that can help.
1. Watch what you say. If you make negative statements about an employee or customer, you can be sued for libel, slander or even invasion of privacy or intentional infliction of mental distress. If you badmouth another business, you can be sued for defamation or interference with business relationships. Words have consequences. Before you speak ill of someone, be certain you have the facts to back you up and a good reason for passing along the news. When in doubt, clam up.
2. Put it in writing. Business deals often wind up in court because parties proceeded on only a handshake. It's far better to summarize your deal in a written contract or letter so everyone is clear about the terms. This can help even if you and the other party know each other well and trust one another. People who act in good faith can still have poor memories. The task of writing down an agreement forces both people to think through the issues and resolve differences before they become a problem. Don't assume that you and the other person see things the same way.
3. Do a safety check. Lawsuits by people who have been injured at someone's store, office or workshop are common. Even if you have a ton of insurance, you shouldn't ignore hazardous conditions. The insurance will pay the injured person's claim (up to the policy limits) but won't compensate you for your time and effort in helping defend against the claim. Check periodically for dangers in your business place. Visitors can slip and fall on a wet floor or trip over a cord. Poor lighting can increase the risk of an injury. Your insurance company can recommend a safety checklist for your business.
4. Read your lease. Make sure the terms are clear before you sign it. You don't want to litigate with your landlord about whether you can expand your product line or the services you offer. Questions about what rental rate you'll pay if you renew your lease or who pays for replacing the boiler should be ironed out in the lease, not in a courtroom.
5. Use care in collecting debts. Laws protecting consumers contain pitfalls for the unwary business. Push too hard for payment from a slow-paying customer and you can wind up as a defendant in a lawsuit. Avoid early-morning or late-night calls, and don't discuss the debt with the customer's employer. If the debtor has a lawyer, deal through the lawyer. A simple way to steer clear of collection problems is not to extend credit at all; accept charge cards instead. It costs a bit, but it shifts the burden of collection to the charge-card company.
6. Think twice before fighting unemployment claims. Most employers hate to see an ex-employee file for unemployment benefits, so their first impulse is to fight the claim. Resist that impulse. The unemployment laws strongly favor employees, so usually it's a big waste of time to fight the claim. Besides, battling the ex-employee may increase the bitterness of a job loss and nudge the former worker into suing you for wrongful discharge. Use discretion. Fight claims only if you have a very good chance of winning. Even then it may not be worth it.
7. Check out land-use regulations. A zoning ordinance tells what kind of business you can conduct at a given location. If you violate the ordinance, the city can take you to court to close you down. There are also private rules known as deed restrictions or conditions, covenants and restrictions. These allow neighboring property owners to take you to court for violations. Make sure your business complies with these public and private regulations.
8. Plan for the business divorce. The break-up of a relationship with a co-owner can be as devastating and costly as the break-up of a marriage. You and the co-owners of your business should have a written agreement saying what happens if you can no longer agree on how to run the business or if one of you dies or wants to sell out.
9. Update you employment practices. In recent years, some of the most expensive litigation has involved employees' claims that they were unjustly fired. Don't promise job security unless you intend to follow through. And give employees ample notice if their performance is slipping and their jobs are in jeopardy. A firing shouldn't come as a surprise. If you document your warnings in an employee's file, you greatly reduce the risk of being sued. To avoid discrimination charges, enforce your rules equally.
10. Choose your business name carefully. Check business names in your county and state to make sure some other business didn't get there first. If the name has special value or you're planning to do business in more than one state, have a national name search made. You don't want to have to go to court to defend your business name.
l1. Consider alternative dispute resolution. Think about putting an arbitration clause in all contracts. Arbitration is usually quicker and less expensive than litigation for resolving disputes. If you don't have an arbitration clause in a contract, you and the other party can always agree to arbitration after the dispute arises. Mediation can also help. Although mediation isn't binding on either party, an experienced mediator can usually settle a dispute.
12. Get preventive legal advice. It's less expensive to get legal advice before a problem arises than afterward. Keep you lawyer informed of your business plans, and seek advice if you think you're getting into a sensitive area. Educate yourself on legal issues by taking a course at a community college or by checking out a book or two at your local library. Scan the newspaper for trends in business law.